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Tata Steel Convertibles Fall From One-Year High: India Credit

Anoop Agrawal and Bhuma Shrivastava

February 28, 2013, 12:43 AM EST

Tata Steel Ltd.’s convertible bonds are falling from a one-year high on concern a plan to borrow $2.4 billion will worsen the finances of India’s top steelmaker, after the biggest loss in more than three years.

The company’s 4.5 percent equity-linked notes due 2014 have slid 1 percent from a Jan. 15 peak, driving the yield up by 53 basis points to 3.96 percent, prices from Jefferies Group Inc. show. Offshore Asian debt that can be exchanged for shares rose 1 percent, according to a Nomura International Inc. index. Tata Steel, which has liabilities minus cash of $10.5 billion, plans to raise as much as 130 billion rupees ($2.4 billion) in the next six months for part of a project due to be completed by August 2014, Chief Finance Officer Kaushik Chatterjee said.

Indian convertible bonds are set for the first monthly loss since May as investors including ISM Capital LLP said the region’s highest interest rates are eroding cash and worsening corporate finances. Losses at Tata Steel, India’s fifth most-indebted non-financial company, more than doubled last quarter from the preceding period as a worldwide economic slump eroded steel-industry earnings.

“Investors would get uncomfortable if Tata Steel’s debt isn’t consolidated,” Juergen Maier, a Vienna-based fund manager at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets, said in a Feb. 25 interview. “We have to keep in mind investors aren’t looking at the sector with optimism.”

Interest Expense

The steelmaker’s interest expenses surged 38 percent in the nine months through December from a year earlier to 29.7 billion rupees, according to data compiled by Bloomberg. Its shares lost about 22 percent in the past year in Mumbai trading, even as the S&P BSE Sensex index of local stocks advanced 8.6 percent. The company will raise bank loans under the plan for additional borrowings for its new mill in the eastern state of Odisha, previously known as Orissa, according to CFO Chatterjee.

Project financing is at an advanced stage, he said on a conference call on Feb. 13. “We will be funding almost 50 percent through debt and 50 percent through equity,” he said.

The company aims to raise about 260 billion rupees in loans due in more than eight years, paying an interest rate of about 11.25 percent, two people with direct knowledge of the deal, who asked not to be identified because the details are private, said in August.

Borrowing Plan

“To ensure that the project of this size and complexity is not at any stage found short of funds, debt is being tied up for the project,” Tata Steel’s Mumbai-based spokesman Charudatta Deshpande wrote in an e-mail on Feb. 21, responding to Bloomberg News questions. “This doesn’t translate into drawing of debt.”

The company is still evaluating its options to access credit and will finalize the type of financing when it’s ready to raise the funds, Deshpande wrote.

Bond risk for the European unit of Tata Steel, part of India’s biggest business group, is climbing from a 16-month low. The cost of insuring the company against non-payment for two years using credit-default swaps has increased to 207 basis points from 172 on Jan. 10, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.

Losses Widen

The alloy maker’s losses, including that of unit Tata Steel Europe Ltd., widened to 7.63 billion rupees in the three months ended Dec. 31 from 6.03 billion rupees a year earlier, the Mumbai-based company said in a statement on Feb. 13. The median loss estimate of 25 analysts in a Bloomberg survey was 1.99 billion rupees. ArcelorMittal, the world’s largest producer, reported on Feb. 6 a decline in fourth-quarter earnings before interest, tax, depreciation and amortization to $1.32 billion from $1.71 billion a year earlier.

Producers in Europe, where Tata generates two-thirds of its output, are grappling with excess capacity, falling prices and rising operating costs. The region has a capacity to make about 210 million metric tons of steel a year, while demand in a “normal market” is 150 million to 160 million tons, according to industry lobby group Eurofer.

Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have negative outlooks on Tata Steel’s ratings. Moody’s cut the ranking for the firm’s European operations to junk in August. Crisil Ltd., the Indian unit of S&P, rates the parent’s rupee-denominated debt AA, the third-highest investment grade.

Rupee Rates

Relatively high interest costs in India are adding to the pressure on local company finances.

The yield on the 8.15 percent government debt due June 2022 fell one basis point in Mumbai today, offering an extra 590 basis points over Treasuries. Indian sovereign notes returned 11.6 percent in the past year, trailing the 11.8 percent earned by Philippine securities in the best performance among Asia’s 10 biggest markets, according to HSBC Holdings Plc indexes. The rupee strengthened 0.3 percent to 53.69 per dollar today.

‘Lack of Demand’

“Core sectors like cement and steel are under pressure due to lack of demand and high borrowing costs,” said D.R. Dogra, managing director of CARE Ratings Ltd., a Mumbai-based risk assessor that covers 1,200 companies. “A combination of monetary and fiscal factors is needed to boost demand and to revive the sectors.”

Reserve Bank of India Governor Duvvuri Subbarao cut the benchmark repurchase rate on Jan. 29 by 25 basis points to 7.75 percent, the first reduction in nine months, to support the economy. Since mid-September, Prime Minister Manmohan Singh has allowed more foreign investment in industries and markets and cut taxes on companies’ overseas debt to spur growth.

That helped lower the yield on Tata Steel’s 10.2 percent rupee-denominated debt due 2015 to 9.15 percent at the end of January from last year’s peak of 10.30 percent in May, prices from the Fixed Income Money Market and Derivatives Association of India show.

The steelmaker faces $4.69 billion in repayments of existing obligations in the next three years, data compiled by Bloomberg show. The Tata group needs to lower its liabilities to a “more manageable level,” Ratan Tata, who retired as its chairman in December, said in an interview with Financial Times published on the newspaper’s website on Dec. 6.

Cutting Jobs

Tata Steel plans to restructure its U.K. business, cutting 900 jobs and closing 12 sites, it said in a statement on Nov. 23. The reductions will include the loss of 580 jobs and the closing of its Tafarnaubach and Cross Keys plants in South Wales, according to the statement.

“Steelmakers should consider consolidating their debt before there is a greater impact on margins and bottom lines,” said Walter Rossini, who manages about $200 million in Indian assets at Aletti Gestielle SGR SpA in Milan. “Investors are bearing in mind that interest costs are high and won’t fall anytime soon. Investments in steel may be at risk if there is no positive news flow.”